VAT — Grant of lease — Consideration — School granting lease of sports and leisure centre to lessee on terms that school able to use certain facilities — Commissioners assessing provision of facilities as standard-rated supply by appellant for VAT purposes — Whether school’s right to use facilities properly characterised as reservation from demise or provision of services as consideration for lease — Method of valuing consideration
In 2003, the appellant company took a lease of a leisure centre and sports fields from the landlord school. The lease was for a peppercorn rent and permitted the school to continue to use the facilities in the leisure centre at certain times and on certain terms. The lease was expressed as being a demise of the entire premises, while clause 4.33 provided: “The Tenant will permit the Landlord including their agents employees and members of [the school] access to the facilities at the Premises on the terms and in the manner set out in the Seventh Schedule.” Schedule 7 stated: “The Tenant grants the Landlord… rights to use the sports facilities at the Premises at no cost on the following terms… .” The respondents assessed the appellant for VAT on the transaction on the assumption that it involved a barter situation whereby the appellant was supplying standard-rated services at the leisure centre in return for the initial grant of the lease, which was an exempt supply.
On an appeal by the appellant, issues arose as to: (i) whether the transaction was properly characterised as a barter or whether the school’s rights to use the leisure centre were merely rights retained by it and carved out of the demise made by the lease; and (ii) if the former were the correct analysis, the appropriate method of valuing the consideration received by the appellant for the services that it provided to the school.
Held: The appeal was dismissed. (1) The transaction was properly characterised as a barter. The terms of the demise were not made subject to the rights provided for in Schedule 7, which was framed specifically in terms of rights being granted. Clause 4.33 was ambiguous, and could be interpreted either as an exception or reservation of user rights from the lease or a grant of those rights by permission of the tenant. However, the latter was the correct interpretation in the light of the other relevant lease provisions and bearing in mind that the appellant was obliged to provide services, such as a fully working heated and chlorinated swimming pool, rather than rights that could merely be retained by the school as landlord. (2) There was a sufficient link between the provision of the services and the receipt of the lease for the lease to constitute consideration for VAT purposes. In calculating the monetary value of consideration, the rule is that where a monetary equivalent has been established as the value of the services being provided, the consideration constitutes the amount of that money equivalent. Since all the services provided to the school were priced for third-party purchasers using the various recreational facilities, those prices represented the starting point. It was necessary also to consider the degree to which prices quoted to individual commercial users of the facilities might not be a fair indication of the consideration. The school’s user rights were essentially equivalent to those of a company taking corporate membership of a health club on behalf of its employees, to whom a substantial discount would probably be given. Moreover, the school’s use of the facilities varied from time to time. Attention should therefore be given, period by period, to the appellant’s “discount adjusted” current list prices for those services that the school was minded to receive from time to time.
The following cases are referred to in this report.
Apple & Pear Development Council v Customs & Excise Commissioners [1988] 2 All ER 922; [1988] STC 221, ECJ
Customs & Excise Commissioners v Westmorland Motorway Services Ltd [1998] STC 431, CA
Naturally Yours Cosmetics Ltd v Customs & Excise Commissioners [1988] STC 879, ECJ
This was an appeal by the appellant, Riverside Sports & Leisure Ltd, from a decision of the Commissioners for HM Revenue & Customs assessing the appellant for VAT on a lease transaction.
Andre Morgan FCA (of Wildin & Co, of Lydney) appeared for the appellant; Andrea Strugo (instructed by the legal department of HM Revenue & Customs) represented the respondents.
Tribunal’s decision:
Introduction
[1] This was an interesting case. It involved the grant of a lease over some sports fields by King’s School, Gloucester, to the appellant company, under which the school received a peppercorn rent, and under which the school was entitled to use the facilities in a sports and leisure centre (which otherwise the appellant exploited commercially) at certain defined times and in certain respects. The assessments made by HM Revenue & Customs (HMRC) were based upon the notion that the transaction was a barter transaction such that the appellant was really supplying the services at the leisure centre in return for the initial grant of the lease. Since the services rendered were standard-rated, whereas the grant of the lease was an exempt transaction, the barter analysis resulted in various assessments being made on the appellant. Thus, just as though the school had received, say, £20,000 rent and in return the appellant had received £20,000 for the provision of sporting facilities, whereupon the £20,000 for the facilities would have been the consideration for a taxable supply and the rent paid would have been an exempt input, so the same was asserted in this case, notwithstanding that no cash passed in either direction.
[2] The two questions for our determination were whether there was indeed a barter transaction or whether the school’s user rights were merely something retained by the school and carved out of the demise made under the lease. The second question arose only if the conclusion |page:76| was that the transaction was a barter transaction, and that question was how then to value the consideration received by the appellant for the service rendered to the school.
[3] We have decided both questions essentially in favour of the respondents, although we have, as requested, added some comments on how in particular we consider that the consideration should be calculated.
Facts in more detail
[4] On 3 December 2002, the King’s School, Gloucester granted a lease over “the Riverside Sports Club, Gloucester”, to two individuals, Mr Phillip and Mrs Gillian Taylor, trading as “The Riverside Sports Club, Gloucester”. Under this lease, there were three clauses or three or four sets of provisions of relevance to the tax question before us.
[5] Without going into detail, early clauses in the lease granted a full demise of the entire property upon which seemingly the sports facility stood. The only rights reserved in the early clauses and retained by the landlord the school were rights geared to inspection, drains, and other such matters relevant to retained adjacent land of the school.
[6] Under various clauses, the tenants were required to maintain the facilities in good working order, and were they to fail to do so, the landlord could determine the lease.
[7] Clause 4.33 then provided as follows:
The tenant will permit the Landlord including their agents employees and members of Kings School Gloucester access to the facilities at the Premises on the terms and in the manner set out in the Seventh Schedule.
[8] Finally, the seventh schedule commenced with the following words:
Landlord’s rights to use the facilities at the Premises
The Tenant grants the Landlord (which expression shall include their agents employees (but in respect of employees to no more than 30 in any one year) and members of Kings School Gloucester) rights to use the sports facilities at the Premises at no cost on the following terms (or such other terms as shall be agreed or substituted between the Landlord and the Tenant (acting reasonably)).
There then followed a long list indicating the various times at which the squash courts, the gym, the swimming pool and the soft play area could be used either exclusively or to some extent by members of the school. Another clause of the seventh schedule gave “free membership of all the sports and social facilities at the Premises for all of the school staff up to a maximum of 30 persons at any one time”. Another gave “a discount of no less than 15% to each pupil of the School wishing to use independently of the school any of the facilities at the Premises”.
[9] Both parties could give only vague information concerning the background to the current lease. This was unfortunate because, for reasons that we will refer to below, we consider that the facts that seem most likely to have occurred in the past would actually have reinforced the respondents’ case in respect of the first question for decision.
[10] One of the certain facts is that the first lease taken by the Taylors was taken in 1988, and that from 1988 until 1 April 2003 they carried on the leisure club business as partners. On 1 April 2003, the appellant took over the business, and doubtless took an assignment of the lease. When the Taylors took their lease in 1988, there had been an earlier lease and an earlier operator. The first operator seemingly acquired a lease in 1966 and built the sports and leisure complex. The Taylors built further facilities after their acquisition, in 1988, because we were told that the business was expanded to include “a swimming pool and other additional facilities”. No one knew the facts but it seemed likely that the swimming pool had been built before the 2002 lease was granted, in that that lease referred to a swimming pool as though it existed. Whether, of course, it was a previous or inferior pool we do not know, but, for present purposes, we assume that the present pool was constructed prior to the grant of the present lease.
Contentions on behalf of the appellant
[11] It was contended on behalf of the appellant that:
● the barter analysis advanced by HMRC was wrong because the school’s rights of occupation derived not from consideration given by the appellant in return for the lease but from the exclusion of those rights from the grant of the lease, such that they were retained rights; and
● if the first argument were wrong, the consideration given for the grant of the user rights could not exceed £15,000 because the appellant had obtained an indicative valuation that the ground rent for the demised premises would be “something in the region of £15,000”.
Contentions on behalf of the respondents
[12] It was contended on behalf of the respondents that:
● the grant of the lease by the school was clearly a grant of the entire premises, with no rights carved out and retained, and the wording of schedule 7 was inconsistent with anything other than a grant back by the appellant of user rights to the school, so that there was a barter transaction of the grant of the lease in return for the grant of certain user rights; and
● the correct way in which to value the consideration received by the appellant in a case where there was evidence from other transactions of what the user rights would fetch was to pay regard to that other evidence;
● in this case, there were list prices for membership and entrance fees to the squash courts, swimming pool and gym, so that regard should be paid to those in valuing the consideration (consisting of the initial grant of the lease for the peppercorn rent) received by the appellant for the user rights;
● if the previous valuation propositions were wrong, the authorities then indicated that one should next look to the cost to the appellant of providing the facilities; so that:
● calculating the cost by reference to the third-party fees forfeited on account of the user rights granted to the school, one ended up with essentially the same calculation since the forfeited third-party receipts were the same listed prices for the use of the facilities to which regard had to be paid on the first valuation approach;
● finally, it was pertinent to note that the valuation obtained by the appellant was an indicative valuation only and that the valuation of the proper ground rent for the lease was a far more nebulous matter than the ascertainable prices, and thus values for, the user rights.
Our decision
Whether the school derives its user rights as consideration for the grant of the lease or as an interest retained and not comprised within the grant.
[13] We initially found the drafting of the lease somewhat confusing in respect of the determination of whether the user rights were something retained by the school and never granted to the appellant or, alternatively, the consideration for the grant of the lease. The wording of clause 4.33, which we have already quoted, appeared at least to be consistent with an exception or reservation from the lease, and although the seventh schedule was framed in terms of the tenant granting various rights, it appeared not to have been executed as a licence from the tenant back to the landlord but, rather, to be in the form of the defined matters to which clause 4.33 referred.
[14] We accept, however, that the respondents’ argument on this matter is correct and that the user rights were granted as the consideration for the lease. We confirm that the terms of the demise in clause 3, albeit made subject to various reserved rights of the landlord in respect of matters such as drains, pipes, wiring and so forth were not made subject to the rights granted by schedule 7. We also accept that schedule 7 was framed quite specifically in terms of rights being granted. Furthermore, at best for the appellant, clause 4.33 was ambiguous. It could perfectly consistently be interpreted to involve the grant, by permission, of user rights, rather than the reservation of user rights. Moreover, in the light of the total demise in clause 3 and the clear drafting of schedule 7, we decide that this is indeed the correct interpretation.
[15] This conclusion is fortified by two further considerations, one of which the respondents advanced and the other of which (albeit |page:77| regrettably based upon speculation by us) points to the strong logic of treating the user rights as the consideration for the grant of the lease.
[16] The argument that the respondents advanced, with which we agree, is that the terms of the rights granted by the appellant involved the provision of services, such as the provision of a fully working heated and chlorinated swimming pool, and, in most part, not rights that could sensibly merely be retained by the landlord. They were certainly rights that the tenant that operated the recreation centre could obviously grant in return for the lease, however, since they involved the provision of the same services as the appellant provided to the public.
[17] We place little reliance upon the last point that we mention because we confirm that although we asked both parties to give us background information in respect of this matter, no one at the hearing had any information at all concerning the relevant facts, and counsel for the respondents argued (as in fact we have accepted in [14] and [16] above) that we could reach our decision on the barter point without understanding the background. Although that may be so, the 2002 lease was obviously somewhat curious because it made no reference to the question of why, if all the relevant facilities were in place and presumably vested in the landlord in 2002, the landlord, namely the school, granted a peppercorn lease to the tenant when the tenant had no building obligation whatsoever under the lease. On the face of it, the rental that the school might have commanded was not one geared to a ground rent for an undeveloped site but a rent for a completed leisure centre that would enable a commercial company to operate the centre and make profits of £150,000-250,000 pa merely for maintaining and staffing a substantial existing developed site. The seemingly obvious answer to this is that, doubtless back in 1966, the initial deal with the first tenant would have been on the basis that the tenant obtained a lease at a peppercorn rent and undertook to build the first complex and to grant user rights back to the school. Viewed in that manner, the user rights would plainly be the consideration because they would be bound up with the building obligation and could not possibly be retained rights. It must then follow that when the Taylors came on the scene in 1988, they would in some way have bought the centre from the first tenant, albeit that for some reason a new lease was granted. Whether that lease included the obligation to build the swimming pool we do not know, but it seems that the school was plainly accepting the reality that the Taylors could succeed to the value and the rights and assets that the first tenant had earned, and it was not the case that, in 1988, the entire value of the developed site dropped back absolutely into the hands of the school. Similarly, in 2002, although a new lease was granted, the absence of very substantial consideration beyond the peppercorn and the user rights must have been explained by the fact that the school, although formally granting a new lease, must have acknowledged that the Taylors had much of the capital value of the existing facilities, in right of their pre-existing lease, and whatever rights they had bought from the first tenant. Viewed in this way, in other words in the sense that the present tenant must somehow be succeeding to the role of the earlier tenants, it makes more sense to see the user rights as consideration, since the original deal (to which others have succeeded) must have involved the swap of a cheap lease in exchange for a building obligation and user rights.
[18] For these reasons, and placing little reliance upon the speculation referred to in [17] (albeit that this makes sense of everything), we decide the first “barter” issue in favour of the respondents. We have already mentioned in the introduction above that although it may seem odd that the appellant is rendering a taxable service with a VAT liability when no money passes in either direction, we repeat that this is not at all strange. Indeed, the result would be identical had the parties paid cash consideration in both directions for the lease and the user rights, since the service supplied by the appellant would have been taxable, and the related input would have been an exempt item.
[19] We might mention that there was one argument advanced by the respondents that we did not accept, although, in the event, this is of no consequence. It was asserted that the issue of whether the user rights acquired or retained by the school were the consideration for the grant of the lease or, alternatively, rights reserved from the initial grant was resolved for VAT purposes by the rule that anything done for a consideration is to be treated as a supply of services for VAT purposes. We entirely accept that the nature of the services indicated (as we accepted in [16] above) was that they were active services being supplied to the school, and we also accept that this is consistent with any sensible assumption as to the background facts (as indicated in [17] above), but we consider that had the right analysis been that the school had simply carved its retained user rights out of the grant of the lease in the first place, the right analysis would have been that less had been transferred; correspondingly, less or no consideration would be expected, and the user rights would be something held all along and not consideration for a supply by the tenant.
Whether the consideration was given in return for the grant of the lease
[20] We turn briefly to the different question of whether there was a sufficient link between the provision of the services and the receipt of the lease for the grant of the lease to constitute consideration for VAT purposes. In other words, we address the type of question considered in Apple & Pear Development Council v Customs & Excise Commissioners [1988] STC 221, where it was held that the charges imposed by statute upon the various growers were not in the requisite sense consideration.
[21] Not least because the appellant did not even assert the contrary, we are quite clear that the grant of the lease was the consideration for the provision of the services in the requisite manner.
How to measure the amount of the consideration received by the appellant for the provision of the user rights
[22] This takes us to the final question of how to calculate the monetary value of the consideration received by the appellant for VAT purposes. Having considered in detail the various authorities upon which the respondents relied, in particular Naturally Yours Cosmetics Ltd v Customs & Excise Commissioners [1988] STC 879, we accept that where a monetary equivalent has been established as the value of the services being provided, then, when goods or services are supplied, the consideration is the amount of that monetary equivalent. Thus, in Naturally Yours, where some particular cosmetic product could be purchased for £10.14, and it was provided to hostesses in return for £1.50 and certain slightly nebulous services in return, the consideration received by the supplier was in total £10.14, consisting of the cash and the remaining consideration as to the balance up to £10.14. Thus, in this case, we accept that because all the services rendered to the school were priced for third-party purchasers of the various recreational services, those prices are at least the starting point in calculating the monetary value of the consideration received by the appellant.
[23] The appellant had argued that the consideration could not be more that the indicative value placed on the likely ground rent attributable to the lease, an independent valuer having said that he would expect the valuation to be somewhere in the region of £15,000 pa. We certainly accept that one would expect there to be a correlation between the consideration viewed from each side of the deal (albeit that we will have to refer shortly to a situation in which the two could diverge). After all, the deal, albeit now buried in historical background of which we were regrettably ignorant, had presumably been an arm’s-length deal. Nevertheless, the appellant’s argument paid no regard to the authorities such as Naturally Yours, and indeed several others; the valuation was one given, without charge, simply as a rough indication, and, finally, the valuation made no reference to the oddities of the transaction in 2002 to which we have referred in [17] above. We have no doubt that the valuer would have assumed, realistically, that the appellant should be treated as being entitled to the value contributed by the various tenants, and that the rental commanded by the school should therefore be confined to a ground rent, but we found it a little odd that even this assumption was not stated in the valuation letter.
[24] We were requested to give our decision, first and foremost on the two points of principle, namely as to whether the grant of the lease was the consideration for the user rights and whether the respondents were fundamentally right in their approach to the valuation of the |page:78| consideration. We repeat that we decide those two points in favour of the respondents.
[25] We were, however, asked if we would give any indications that we thought appropriate in respect of how the parties should approach the detailed calculation of the consideration and, in this context, we wish to make two points.
[26] First, without our having been given much detail as to how the claimed calculation of consideration advanced by the respondents had been arrived at, we consider that it would certainly be appropriate for the respondents to dwell on the degree to which the quoted prices to commercial users of the sports centre might not be a fair indication of the consideration in this case. We certainly imagine that the individual prices quoted for entry to the swimming pool for one person would be very considerably higher than a block booking for, say, a company with numerous employees, or indeed a school with numerous pupils who might use the pool in large numbers at just a few pre-arranged times. We do not suggest that the type of “bulk discount” point removes this case altogether from the Naturally Yours line of authorities, and we understand that certain discounts are already being conceded. However, we just emphasise that this seems entirely appropriate to us. Another consideration is perhaps the likelihood that the school might well want to use the facilities at times when other schoolchildren would be likely to be at their respective schools and not therefore able to use the facilities, and also not at times (in other words, in the evening) when third-party members who might well work during the day might want to use the facilities. All these factors seem to us in fairness to be relevant, in that the school’s user rights are essentially equivalent to those of a company taking corporate membership on behalf of all of its employees of a health club, and we imagine that the corporate member would be given a very substantial discount.
[27] The second factor that we wish to mention is whether the consideration for the user rights is something that might be seen to fluctuate in different periods. The respondents somewhat seemed to be trying to “have it both ways” in this regard, in that they accepted, on the one hand, that what had to be valued was the actual rights used in each period, as distinct from user rights some of which were not being taken up at all, but at the same time the respondents said that because the lease had been taken in 2002, some aspects of the valuation should be fixed at 2002 levels. On this point, we consider that what is relevant is the value, in each period, of the services actually being provided. Thus, if it is clear (as apparently it is) that the school does not want to take up its right to use the soft play area, the user of that should be ignored (as indeed it is rightly being ignored at present). This approach would have no effect of course in respect of user of some facility that the school might generally want to use if on occasions no pupils use an available facility.
[28] It seems to us to be consistent with the proposition that one should be looking to the actual facts, and to the services being provided in each period, that one should also fix the consideration period by period, albeit that, hopefully, variations would be marginal. In response to the possible objection that it might be said that the consideration given, namely the grant of the lease, was surely something that would not fluctuate, we note that this case seems to be somewhat analogous to that of the supply of a free meal and cigarettes to coach drivers who brought 20 passengers into a motorway services station for 30mins or more in Customs & Excise Commissioners v Westmorland Motorway Services Ltd [1998] STC 431. Although two different coach drivers each bringing the same number of passengers into the motorway services for the same period might appear to give identical consideration, the measure of the consideration for the supply of the meals was still the list price of either an expensive meal or a cheap meal, as chosen by each coach driver. So, it seems to us that, in this case, the attention should be given, period by period, to the “discount adjusted” current list prices at which similar services are being provided by the appellant for those services, that the school is minded to receive from time to time.
Appeal dismissed.